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Macroeconomic consequences of outsourcing : An analysis of growth, welfare, and product variety

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Author Info
Groot, H.L.F. de (Tilburg University, Center for Economic Research)

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Abstract

Outsourcing of non-core activities by firms is nowadays a common business strategy. This paper provides a theoretical framework for analyzing a firms' incentive to follow such a strategy and its consequences for macroeconomic variables like growth and product variety. We divide production activities into core and non-core activities. Non-core activities can be performed within the firm or can be mediated by the market. We will derive conditions under which outsourcing will occur, and under which outsourcing will be socially desirable. These conditions do not necessarily coincide due to two externalities. Outsourcing may hence be a profitable strategy for firms, while it is socially suboptimal. Crucial parameters in the model are the relative scale of core versus non-core activities, traditional management costs, transaction costs and taste for variety of consumers. This paper suggests that declining transaction costs are a crucial factor in explaining the observed increase in outsourcing.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 43.

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Date of creation: 1998
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Handle: RePEc:dgr:kubcen:199843

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Related research
Keywords: outsourcing;

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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

References listed on IDEAS
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  1. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics 95-14, California Davis - Department of Economics.
    Other versions:
  2. Audretsch, David B, 1995. "The Innovation, Unemployment and Competitiveness Challenge in Germany," CEPR Discussion Papers 1152, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July. [Downloadable!] (restricted)
  4. Ciccone, Antonio & Matsuyama, Kiminori, 1996. "Start-up costs and pecuniary externalities as barriers to economic development," Journal of Development Economics, Elsevier, vol. 49(1), pages 33-59, April. [Downloadable!] (restricted)
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  5. William T. Dickens & Lawrence F. Katz, 1987. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Kelly, Morgan, 1997. "The Dynamics of Smithian Growth," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 939-64, August.
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  7. Postner, Harry H, 1990. "The Contracting-Out Problem in Service Sector Analysis: Choice of Statistical Unit," Review of Income and Wealth, Blackwell Publishing, vol. 36(2), pages 177-86, June.
  8. Kiminori Matsuyama, 1995. "Complementarities and Cumulative Processes in Models of Monopolistic Competition," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 701-729, June. [Downloadable!] (restricted)
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  9. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185. [Downloadable!] (restricted)
  10. Smulders, Sjak & van de Klundert, Theo, 1995. "Imperfect competition, concentration and growth with firm-specific R & D," European Economic Review, Elsevier, vol. 39(1), pages 139-160, January. [Downloadable!] (restricted)
  11. Robert C. Feenstra & Deng-Shing Huang & Gary G. Hamilton, 1997. "Business Groups and Trade in East Asia: Part 1, Networked Equilibria," NBER Working Papers 5886, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Donald Siegel & Zvi Griliches, 1992. "Purchased Services, Outsourcing, Computers, and Productivity in Manufacturing," NBER Chapters, in: Output Measurement in the Service Sectors, pages 429-460 National Bureau of Economic Research, Inc. [Downloadable!]
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  13. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  14. Groot, H.L.F. de & Nahuis, R., 1997. "Optimal product variety, scale effects, and growth," Discussion Paper 54, Tilburg University, Center for Economic Research. [Downloadable!]
  15. Katharine G. Abraham & Susan K. Taylor, 1993. "Firms' Use of Outside Contractors: Theory and Evidence," NBER Working Papers 4468, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kong Weng Ho & Hian Teck Hoon, 2003. "Service Links and Wage Inequality," Departmental Working Papers wp0301, National University of Singapore, Department of Economics. [Downloadable!]
  2. Gamal Atallah, 2002. "Production Technology, Information Technology, and Vertical Integration under Asymmetric Information," CIRANO Working Papers 2002s-32, CIRANO. [Downloadable!]
  3. Nicholas C. S. Sim, 2004. "International production sharing and economic development: moving up the value-chain for a small-open economy," Applied Economics Letters, Taylor and Francis Journals, vol. 11(14), pages 885-889, November. [Downloadable!] (restricted)
  4. Bernd Görzig & Andreas Stephan, 2002. "Outsourcing and Firm-level Performance," Discussion Papers of DIW Berlin 309, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
  5. Henk L.M. Kox, 2003. "Sources of structural growth in business services," Industrial Organization 0309004, EconWPA. [Downloadable!]
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